Big Banks’ ‘Living Wills’ Promise Bankruptcy Instead of Bailouts

U.S. regulators, seeking to prevent a repeat of taxpayer-funded bailouts of the financial system, released summaries of plans for breaking up nine of the world’s largest banks in the event of an emergency.

The Federal Deposit Insurance Corp. and Federal Reserve posted the public portions of so-called living wills on its website today as required by the 2010 Dodd-Frank Act. The documents outline more detailed proposals submitted privately to regulators describing how the companies can be dismantled if they fail.

The aim of the living wills is to give regulators a plan for shutting down complex financial firms without taxpayer bailouts or the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc.

Banks with more than $250 billion in nonbank assets were the first of an eventual 125 firms required to produce liquidation plans, which are expected to run into thousands of pages. Nonbank companies declared by U.S. regulators to be systemically important will also have to submit living wills.

Few Details

The public summaries of the wind-down plans reveal few details. For instance, Bank of America’s summary says that assets sold off during a resolution could go to a “range of buyers including, but not limited to, national, international and regional financial institutions; private equity and hedge funds; and other financial asset buyers such as insurance companies.”

Goldman Sachs, the fifth-largest U.S. bank, said it would sell assets or businesses in the event of a problem, which would avoid the need for a company-wide liquidation, according to its plan. The sales, which Goldman Sachs said would need to be conducted “quickly,” would be to potential buyers from categories that echo Bank of America’s list.

“If it proves impossible to sell GS Group businesses and assets then it would be possible to liquidate a substantial majority of GS Group’s assets,” the company said. Such a strategy would “likely take more time,” according to the plan.

‘Separable’ Businesses

Morgan Stanley, the New York-based owner of the world’s largest brokerage, said its plan considers the sale of “separable” businesses and material units, 18 of which were listed in the document.

“The same stresses that would prompt me to put a subsidiary up for sale would make it just as difficult for another entity to make a purchase,” said Donald Lamson, who represents financial institutions at Shearman & Sterling LLP in Washington.

Regulators instructed the banks to design their resolution plans for individual failures, rather than a market crisis affecting more than one financial institution. The regulators may require more complicated stress scenarios in future rounds, according to the law.

The information in this first round of “very high-level” summaries is not much deeper than what can be found in existing securities filings, Lamson said.

“I think that in a lot of these statements, there’s the parenthetical: ‘We hope,’” Lamson said. “These are all forward-looking assessments, and it’s very hard to see the future.”

The regulators must determine whether each living will represents a “credible” path to a rapid and orderly bankruptcy. The agencies have 60 days from submission of the plans to request more information from the companies.